We are back into the IMF’s 3-year $6 billion Extended Fund Facility (EFF) arrangement having received a $500 million tranche by pledging, by way of collateral, to increase taxes by a massive Rs1.272 trillion (almost 2.8 per cent of GDP) in the coming budget and jack up electricity rates by almost Rs4.97 per unit in the remaining three months of the current fiscal year.
The government has also given an undertaking to continue making electricity tariff adjustments next year on monthly, quarterly and annual basis through “automaticity” of regulator Nepra’s amended powers. The documents also suggest that the government would continue increasing petroleum levy on oil products to the maximum level (Rs30 per litre) this year and next year to collect about Rs510 billion this year instead of budgeted target of Rs450bn. The petroleum levy target for the next year has been set at Rs607bn.
The provinces have given an undertaking to provide Rs 570 billion cash surplus to the federal government and increase it to Rs 729 billion by next year. As such, the tax collection target for the Federal Board of Revenue (FBR) in next year’s budget has been committed at Rs 5.963 trillion against Rs 4.691 trillion revised target for the current fiscal year. About Rs 500 billion will be additional tax generation through “general sales tax (GST) and a personal income tax reform with the FY2022 budget, yielding an estimated 1.1 percent of GDP”.
Under the agreement, the government would also bring down the current year’s development programme to Rs1.169 trillion against budgeted target of Rs1.324 trillion. The IMF has also confirmed that Pakistan had completed a total of five prior actions to revive the Fund programme, including Rs3.57 per unit increase in electricity tariff and submission of the SBP amendment bill to parliament.
All this will unleash another round of cost-push inflation. Overall, the outlook for inflation, as a result, looks worrying. It is likely to rise to a double-digit rate in the coming months. This would add enormously to the financial burden on a population already groaning under escalating prices of essentials because of supply disruptions and eroding incomes because of the Covid-19 pandemic.
A worried Prime Minister Khan has expressed his intentions to request the Fund for a review of its inflation fueling conditionalities. The Fund, however, does not appear to be in the mood to lessen the burden of the conditionalities agreed upon for reviving the EFF. And most likely this would leave the government with no option other than committing default on its core commitments to the Fund.
The Fund forced Bill to amend the “State Bank of Pakistan Act 1956” is said to be exceptionally dangerous for the economy and the country as it compels the government to prioritize meeting the country’s foreign debt obligations over all other expenditures. It actually mentions foreign creditors – the IMF, the World Bank and ADB by name. The Bill effectively transfers decisions with respect to servicing foreign debt from the domain of the federal government to that of the State Bank of Pakistan (SBP).
The SBP is the depository of the country’s foreign exchange reserves on behalf of the federal government. The Bill will authorize the SBP to service the country’s foreign debt out of available reserves without reference to the government. When reserves fall below zero, “the Bank shall request the federal government for a capital contribution to remedy the deficit” and “upon receipt of this request, the Federal Government shall, within a period not exceeding thirty calendar days, transfer to the Bank the necessary amount …”. Clearly, the “request” is an order and it shall be mandatory for the government to act accordingly.
The implication, according to Kaisar Bengali, an eminent economist, is that if the government does not have the resources to comply with the SBP’s “request”, it will have to borrow; thereby, tightening the debt noose further.
“The government will exist only to service its debts and borrow more and more to service them. The government will be left wanting to meet even its salary obligations, including that of the armed forces. The Bill will eliminate remaining semblance of economic sovereignty and render the federal government politically impotent.
“Left with a reduced resource base, different arms of the state – military, civil bureaucracy, provinces – will have to compete for the residual revenues – and competition will be savage. The military will be able to arm-twist the biggest share for itself and the provinces pushed to the bottom of the queue. The NFC Award can be jettisoned under the ‘doctrine of economic necessity’.
“A situation can be foreseen where tax collection efforts are intensified to extortion levels, development activity slows down to minimal and essential public utilities are starved of even regular maintenance funds and collapse. The resultant public protests against unemployment and higher cost of utilities – that suffer from routine breakdowns – can only be put down by repression.”
With the rate of inflation hovering around over 10% and the growth rate stagnating in the vicinity of less than 2% it would be almost impossible to achieve the revenue targets for the current fiscal or next year’s, forcing the government to further reduce the development budget which in turn would further curtail the economy’s ability to generate enough revenues.
According to the IMF, Pakistan’s gross external financing needs - the funds needed to pay off foreign loans and finance imports - amount to $27 billion over the next 12 months. These financing needs, the IMF stated, will be met by support from China’s $11.8 billion, UAE’s $2 billion, World Bank’s $2.8 billion, the G-20’s $1.8 billion initiative, Asian Development Bank’s $1.1 billion and Islamic Development Bank’s $1 billion.
This kind of vicious cycle of decline in economic growth rate and increase in inflation rate followed by a reduction in revenue income forcing development budget to be cut down followed by further decline in the growth rate and escalating inflation rate has resulted in what is called IMF riots in many countries. In order to escape this catastrophic eventuality, Pakistan needs to explore other options, even the option of leaving the IMF programme and going on our own, tapping innovative avenues for evading the on-rushing socio-economic-political upheavals.
One such avenue could be the non-development budget by drastically curtailing which we could perhaps achieve a degree of macroeconomic stability that the IMF with its one-size fit all prescription has been promising to help usher in but has only succeeded at the end of each of its past 22 programmes in pushing Pakistan’s economy further down the dark hole of debt.
Cut your coat according to your cloth: Over the years we have let the government expand out of proportion thereby causing our annual non-development budgets to go out of control. We need to go over this budget with a fine tooth comb along with a close analysis of our defence budget with a view to rationalizing the expenditure under the two heads.
We could begin by reducing the federal government’s responsibilities limiting them to only four tasks - Finance, Foreign Affairs, Defence and Communications - devolving the rest of the responsibilities to the provinces and slimming in turn the non-development budgets of the provinces by reducing their responsibilities to four or five major tasks while devolving further the rest to the local governments.
Here, it would not be out of place to suggest implementing the 18th amendment in its entirety. The amendment eliminates the “Concurrent List,” an enumeration of areas where both federal and provincial governments may legislate but federal law prevails. Laws governing marriage, contracts, firearms possession, labor, educational curriculums, environmental pollution, bankruptcy, and 40 other diverse areas will now devolve to the provinces with the list eliminated, and each provincial assembly will be responsible for drafting its own laws on the issues.
Another important change specifies that future National Finance Commission agreements—which set the distribution of national revenues between the central government and the provinces—cannot reduce the provinces’ share beyond that given in the previous agreement.
Though the amendment mandates the establishment of local governments in all four provinces, it still has to clarify which administrative or financial authorities will be delegated to them or how they should be constituted. But in the meanwhile each province could set up its own provincial finance commission for evolving a resource distribution formula between the provincial and local governments.
Copyright Business Recorder, 2021